Electrical Wholesaling to Analyze 10 Trends that Will Shake the Electrical Industry

Jan. 25, 2013

The economy has turned the corner and looks to be in position for some steady if not spectacular growth in 2013 and some really robust growth in 2014. In next month’s cover story, Electrical Wholesaling will analyze the key macrotrends that will shape how manufacturers, distributors, reps and end users will do business during the next few years. Following is an advanced look at these trends for Electrical Marketing readers.

1. Full-line distributors will remain the primary sales channel for electrical products. Despite body blows from online merchants with no need for local brick-and-mortar branches, home centers and occasional manufacturer initiatives to sell direct, full-line distributors of electrical supplies are standing strong and probably still well over $85 billion worth of electrical products — more than 70% of all electrical products.

That’s an amazing figure when you consider that some well-established alternate channels for electrical supplies account for billions of dollars in sales. For W.W. Grainger Inc., Lake Forest, Ill., electrical products accounted for an estimated $1 billion of its total of $8 billion in 2011 sales. Home Depot and Lowe’s sell up to $2 billion in electrical items (heavily weighted toward residential lighting fixtures, a product area that full-line electrical distributors no longer focus on very much), and while it’s tough to estimate electrical sales for Fastenal Inc., Winona, Minn., the company does have 32,000 electrical stock-keeping units (SKUs) in its catalog and had an astounding 2,652 branches at 2012 year-end.

2. The five largest distributors will continue to acquire smaller distributors to fill in gaps in their geographic market verticals or to build their presence in new market niches. The Big Five —Sonepar North America, Philadelphia; Wesco Distribution Inc., Pittsburgh; Rexel Holdings USA, Dallas; Graybar Electric Co., St. Louis; and Consolidated Electrical Distributors Inc (CED), Irving, Texas — accounted for no less than 30% of industry sales in 2011 and run an estimated 2,300-plus branches in total.

Several of these companies — Rexel, Sonepar, Wesco and CED — have been actively hunting for acquisitions to bolster their market coverage. Together with Border States Electric, Fargo, N.D., and Crescent Electric Supply, East Dubuque, Ill., they have been the most active acquirers in the past and can be expected to be the biggest acquirers in the next few years, too. Also, look for one of these acquirers to buy a distributor of industrial or construction-related supplies in a related market niche like plumbing, HVAC or pipe, valves and fittings.

3. In an increasingly global market, more companies want to do business in the United States. If any industry execs had forgotten that foreign-based, multi-billion-dollar companies like Schneider, Siemens, Legrand, Philips and Nexens are well-entrenched in the North American market, ABB’s acquisition last year of T&B jogged their memory a bit. Despite its recent economic woes, North America is still one of the most lucrative and stable electrical markets in the world. Over the next few years, look for some of the Pacific Rim manufacturers of LEDs to strengthen their positions in the United States through acquisitions.

4. Within five years virtually all electrical distributors will stock LEDs. LEDs are spreading throughout the lighting market application-by-application. The first lighting niches they flooded include exit signs, traffic lights, special effects lighting, hard-to-get-to locations, and streetlights. While we don’t expect them to push top-of-the-line T5 or T8 fluorescent lighting systems out of too many ceiling sockets in the general office lighting market, we do think they will take over some “statement” applications where customers want to make an impression, like lobbies, conference rooms, restaurants, stores and the like.

5. As the residential market recovers, you will find new opportunities to sell products for home theaters, computer networking and security systems. The residential market usually tops out around 20% of the average electrical distributor’s sales. But they can increase that percentage because adding boxes, cabling, fasteners and related brackets, surge protection and surveillance cameras to an order for an electrical contractor who’s wiring a new housing development isn’t much of a stretch. The fact that all signs point to a much better market for homebuilders in 2013 and beyond will make this market even more lucrative.

6. New oil fracking technology will unlock oil and gas resources and create exciting new sales opportunities. The stories coming out of western North Dakota about the amount of business being done in the Bakken oil patch can warm the heart of even the most hardened sales manager. Several distributors recently set up new branches in this remote area, and one rep servicing the region even called it an once-in-a-lifetime sales opportunity. The new fracking technology is also helping companies on a smaller scale in western Pennsylvania, upstate New York and eastern Ohio, and the reports from the oil folks in Oklahoma, Kansas and Colorado say there’s plenty of potential there, too.

7. The solar industry will continue to rely on financial incentives but the wind market will eventually attain financial independence. No photovoltaic (PV) manufacturer has yet had that Oh-My-God R&D moment that radically changes the efficiency of converting sunlight into electricity. That means the only way the ROI can be even remotely palatable for a PV system in most residential or commercial/industrial applications is to rely on outside incentives.

It’s a different scenario in the wind industry, where the technology for utility-scale wind farms is a proven commodity and the industry as a whole is more willing to wean itself off of incentives. Many challenges remain for transporting power from often-remote wind farms to the utility grid, but companies in the wind belt will get some nice incremental business for the construction of these facilities. One big project to watch is the Atlantic Wind Connection, an offshore wind farm in the early stages of development and scheduled to begin construction in 2016 that would supply power to thousands of homes and businesses along the Eastern Seaboard from New Jersey to Virginia. Bechtel and Alsthom are now working on the project and Google is one of its backers with a $200 million investment.

8. The renovation and modernization of the U.S. electrical grid will pump up profits in the utility niche. With the smart grid, integration of renewable power sources like wind and solar onto the grid, expansion because of increased power demands, and the stormproofing of the grid in some regions of the country prone to hurricanes and other storms, we think there will be a ton of new utility business over the next few years.

9. Mobile will dominate communications with customers. Customer use of smartphones and tablets will push more distributors toward online storefronts and force them to rethink how they manage their digital product data and market their companies. To get a sense of the potential here, electrical distributors don’t have to look any further than the smartphone app launched by Grainger in Aug. 2012 to give its customers access to 900,000 of SKUs at www.grainger.com and push its annual sales from e-commerce to 40% to 50% of all sales by 2015.

The move to mobile will also force more companies to ensure their back-end product information on their ERP systems is populated and consistently updated with product data from IDEA, Arlington, Va., or Trade Service, San Diego. It also gives them and reps a very good reason to “mobilize” their marketing and to check out the digital marketing tools offered by industry resources like www.electricsmarts.com.

10. As the younger generation becomes a bigger part of the workforce you will need to get more creative in recruiting, training and incentivizing them. Time marches on, and over the next few years more Baby Boomers have to manage their own mortality, retirement, succession planning — and the fact that the young folks they hire won’t be wired the same as them or their parents. Talk with your industry buddies about what’s worked for them in managing their youngest employees. But most importantly, talk with your best young talent on a regular basis, both informally and in a more structured personnel-evaluation process so you see where they want to go in their careers.